92135139.jpg  The date a Chapter 7 petition is filed is generally the cut off date for measuring the property of a debtor, but two major exceptions exist.  Property acquired by bequest, devise or inheritance or marital settlements received within 180 days after the case is filed is also included in the bankruptcy estate. Bankruptcy Code Section 541(a)(5).  In other words, a debtor may lose inheritance or divorce settlements they become entitled to within 180 days after the bankruptcy is filed.

Most debtor attorneys know this rule well since Chapter 7 Trustees remind every debtor at court to report any inheritance they receive within the next 6 month.  However, bankruptcy attorney Kathy Moran reminds us in her excellent Bankruptcy Mastery blog that not all death benefits necessarily constitute “bequest, devise or inheritance” under 541(a)(5)(A). 

A bequest and devise are transfers of property pursuant to a will.  But what if the deceased did not leave a will or if the transfer was pursuant to a nontestamentary transfer such as “payable on death” account or a Living Trust?  To learn that answer, we must define what the term “inheritance” means under 541(a)(5)(A).

The bankruptcy code does not define the word inheritance.  Black’s Law Dictionary defines “inheritance” as property “received from an ancestor under the laws of intestacy,” or as property “that a person receives by bequest or devise.” Black’s 853 (9th ed. 2009).

Recently, the bankruptcy court for the Northern District of Iowa ruled that $21,269 received by a debtor who was named as the payable on death beneficiary of a Certificate of Deposit was not “inheritance” and the debtor was allowed to keep the money.  (In re Kilstrom, 2011 Bankr. Lexis 955).    In another case a California bankruptcy court ruled that benefits received under a Revocable Living Trust were not subject to a claim of the Chapter 7 Trustee. (Zimmermann v. Spencer (In re Spencer), 306 B.R. 328 (2004).)

Given these cases, it is important for attorneys not to automatically assume that every death benefit received within 180 days of filing bankruptcy is property of the bankruptcy estate.  In addition, cases converted to another bankruptcy chapter under Section 348 complicate this analysis significantly.

It is important for a debtor to inform their attorney if they expect to receive inheritance in the near future.  If a debtor’s parents are in poor health, it may be wise for them to speak with their attorney about revising their will.